The Best View of Closely Held Business Transactions: It's a Process

What You Need to Know

When it comes to the ideal sale and purchase process, everything starts with due diligence.
Another point of emphasis is that teamwork is key, and nobody can navigate the process alone.
It's important to avoid assuming that only the worst-case scenario is possible in bankruptcy.

Monique Hayes, a partner for DGIM Law and an adjunct professor for the University of Miami School of Law, says that people often assume that the due diligence process ahead of a business sale or a similar liquidity event is of significantly more importance for the buyer than the seller.

After all, buyers put up a pile of cash or other valuable assets to gain ownership of the business, from which they hope to derive commensurate value over the long term. Sellers, on the other hand, get to walk away from the deal having monetized years or even decades of hard work — perhaps entering retirement or simply moving on to the next big thing.

The reality, as Hayes told attendees on a recent ThinkAdvisor webinar hosted in partnership with the Investments and Wealth Institute, looks a lot different. In some big ways, she said, the presale due diligence process is equally or more important on the sell-side as it is on the buy-side.

Hayes, who was joined in the discussion by Andrew Crowell, vice chairman of Wealth Management for D.A. Davidson, urged attendees to view the closely held business sale and purchase process as exactly that — a process, not a one-time event. Crowell agreed, arguing this is one area where the adage of “start with the end in mind” holds a lot of water.

According to the pair, advisors and attorneys who can effectively collaborate and coach their clients through the sale or acquisition process are worth their weight in gold. Alternatively, those who fail to give the process its proper consideration can lead a client astray, jeopardizing or destroying significant and hard-earned enterprise value.

Here are five insights that Hayes and Crowell shared on the webinar.

Step 1? Due Diligence

“When it comes to the ideal sale and purchase process, for me, everything starts with due diligence,” Hayes said. “If you’re on the buy side or on the sale side, it’s critical to get an understanding of the current situation for the business. Where assets are there? Where are the revenues coming from? What documents are in place proving and supporting ownership? Also the key info about the client base and the company’s full resource pool. All of this needs to be clearly delineated.”

As noted, this isn’t just something for the buy side.

“There also needs to be a full due diligence process if you’re on the sell-side,” Hayes emphasized. “This will allow you to identify and respond to any vulnerabilities or weaknesses in the business. You need to know these things before you go to market, either so that you price yourself accordingly or, ideally, so that you can get ahead of any issues and make those needed adjustments to be best positioned to optimize the business value.”

The same thing is true for buyers, of course.

“If you’re coming in as the buyer, things look a little different,” Hayes said. “You need to look at the business in an objective context, and you can’t get swept up in any hype that might be swirling around a potential sale — whether it’s about fancy new technology or whatever.”

On Tech in Business Transactions

Hayes explained that technology considerations inform many, if not most, transactions on which she consults. A key part of securing a positive outcome, she said, is being clear-eyed and intentional about what technology one is really buying — or not buying.

“When technology is a central factor in the transaction, you really need to delve into what the actual functional technology is that is driving the business forward,” Hayes said. “You need to understand, for example, who actually owns it? What type of intellectual property issues might be at play? Is the ownership and the creation of the technology properly documented, proven and renewed over time? You need to know that what you think you are buying is what you are really getting at closing.”

Revenue Considerations

From there, an ideal transaction process moves into the assessment of current drivers of revenue.

“Key questions to ask include, is there potential for growth that is untapped?” Hayes said. “Once again, this is something people so commonly overlook on the sell side. It’s not just a buy-side thing.”

One or both parties will often identify untapped opportunity in an organization that could be of immense value to the acquirer, and that can factor into the negotiations and the sale price.

On Collaboration

Hayes and Crowell emphasized the importance of humility and teamwork in the transaction process.

“Collaboration is key,” Crowell said. “In order to maintain the needed level of service and support at this complex stage, it takes a team approach.”

“Maybe one advisor or attorney can adequately guide a client early on in their business ownership journey,” Hayes said. “But, for successful clients looking to sell a business, you have to bring into account all the resources. The accountant has to be at the table, the attorney needs to be at the table, and the advisor needs to know about the transactions that the client is preparing.”

Crowell again agreed.

“Without that collaboration and active communication, on the advisory side, you can’t provide the best service,” he said. “If you just find out after the fact that a deal is structured a certain way, you might have missed out on some big opportunities to optimize the transaction in a way that would have benefited the client for years and years to come.”

Bankruptcy Isn’t a Bad Word

In Hayes’ experience, no other single legal concept in this domain is either as feared or as misunderstood as bankruptcy.

Often, people hear the word bankruptcy and think “fire sale.” In reality, however, bankruptcy isn’t always a bad word. Sometimes, Hayes explained, bankruptcy actually means “big opportunity.”

“One thing for everyone to remember is that, people and businesses that (enter) bankruptcy aren’t necessarily broke or destitute,” Hayes said. “There is financial distress, yes, but that doesn’t mean they are insolvent.”

In practice, this means not assuming that only the worst-case scenario is possible in the bankruptcy process — and therefore not taking action to minimize the harm.

“The other side of things is that bankruptcies by their very nature can create real opportunities, and that’s especially true if you’re not the debtor or the creditor,” Hayes said. “When I tell people that I’m a bankruptcy lawyer, the first thing they say is that, ‘Oh, I hope I never have to call you!’ Well the fact is that you actually might really be excited about calling me one day, because you may have a competitor that filed for bankruptcy and you all of a sudden have a great opportunity to buy out some of their assets at a discount.”

Additionally, for clients filing for bankruptcy, this can be a painful but useful opportunity to reset and, for example, unsaddle themselves from outdated deals that no longer function in the current market.

“it’s a chance to renegotiate a contract or even debt service in a way that allows you to sustain a business,” Hayes said. “This is a lot of the work I do actually. Fire sales do happen, but they aren’t the norm.”